Debt, Egos and Bad Decisions: How Thomas Cook Failed to Adapt to a New Era of Travel - Skift

Posted: 29 Sep 2019 02:22 PM PDT

On March 1, 2013, Thomas Cook announced the formation of a new digital advisory board to help management identify "the leading-edge trends for online businesses".

It included a number of Thomas Cook's senior leadership team, including the then-CEO Harriet Green, who now works at IBM, as well as a selection of outside digital gurus who could help an old-fashioned tour operator adapt to the new reality of travel retail.

It was the latest attempt to reboot a company struggling to adapt, and like so many previous efforts, it failed. That was partly because of Thomas Cook's lack of cash and partly because of internal disputes. The initiative was quietly shelved a couple of years later, by which point Green had moved onto other things.

The episode was a telling anecdote that may have been an early signal of what lay ahead for Thomas Cook. The company made history last week when it collapsed into liquidation after being a fixture in travel for nearly two centuries. The news set off ripple effects across the travel industry worldwide.

As it turns out, the signs of trouble were around for years. John Straw was chairman of that earlier digital advisory board, and now serves as a senior advisor to McKinsey. When he came into the business, it was clear that it hadn't worked out how to organize sales across its different platforms with the online and physical retail businesses, effectively treated as two separate entities with different profit and loss statements.

"Retail felt that e-commerce was taking sales from it and e-commerce felt their job was to actually expand market share. But retail didn't get that. So we had quite a bit of a political problem that actually retail didn't want to cooperate with digital," he told Skift.

Green managed to get the two working together, but according to Straw, Thomas Cook's problems ran much deeper, with no customer relationship management software in place to track customers and a "decades old" IT system, that used a programming language developed in the 1950s.

It was clear that to change things and help Thomas Cook compete with its younger and nimbler travel rivals, the business was going to need both time and money but as with many listed companies, short-term thinking ruled.

Green's approach faced some criticism from within the travel industry for her use of management consultants and for simply cutting back the business through sales, without replacing it with anything else.

"I think that the change from the board perspective didn't come as quickly as it was desired to be. And that was going to have a short medium term effect on the P&L (profits and losses). And…again, it comes back down to legacy IT because we couldn't change the systems as quickly enough as we wanted, which is why the board got irritated, and which is why Harriet went," Straw said.

There are those who dispute Straw's framing of events – "Retail versus online that's a red herring," said one familiar with Thomas Cook at the time, who spoke under the condition of anonymity.

But the failure of a legacy operator rooted in the physical world isn't surprising but neither is it inevitable – just look at Thomas Cook's biggest rival TUI and the scores of banks and airlines that manage to get by with equally decrepit IT systems.

So how did an iconic brand with a 178-year history, employing 21,000 people across 16 countries, collapse?

A History of Debt

Earlier this year Thomas Cook stunned the city by announcing a pre-tax loss of $1.8 billion (£1.5 billion). Most of this came from an impairment charge of $1.4 billion (£1.1 billion) stretching all the way back to its merger with rival MyTravel in 2007. The chickens were beginning to come home to roost.

"They never really sorted out that capital position fully or the debts of MyTravel," said one travel industry veteran.

The merger added a number of brands, turning Thomas Cook into a truly international business with airlines, hotels, travel agencies and tour operators and under CEO Manny Fontenla-Novoa, the company kept expanding buying up niche brands and organizing an ill-thought out share buyback program.

Incredibly, in the space of a year, the company went from a positive position of $484 million (£394 million) to having a net debt of $360 million (293 million) in 2008. It would never be in as strong a financial position again.

Then, in 2010 right at the time the company should have been looking to improve its online offering, it decided to merge its UK retail operations with one of its main rivals, creating a shop footprint of more than 1,200.

"There was never any sense in the co-op deal," one senior travel industry executive told Skift.

Not only did it saddle the company with more shops than they needed, which it then had to pay to close down in years to come, it actually cost Thomas Cook $101 million (£82 million) because of the way the deal was structured.

Earlier that same year during investor day, Simon Breakwell, the company's e-commerce advisor, who had worked at Expedia and Uber, outlined plans for the company to become a top-three player in the online travel agency market with revenue of between $492 to $454 million (£400 and £450 million).

Thomas Cook's last big crisis in 2011 scuppered any grand online ambitions with Fontenla-Novoa's spending spree eventually costing him his job, having almost brought the company to its knees.

Skift contacted Fontenla-Novoa for this article but did not hear back. However, in an interview for Let's Go, a book on the development of the package travel industry, he saw his departure differently.

"What happened in the run-up to my exit is that whilst we made some very good acquisitions, we were a publicly quoted company. We had to ride out some particularly tough times such as the ash cloud crisis of 2010, the rocketing cost of fuel and a weak pound," he told author Dave Richardson.

"In many markets we were still profitable and doing better than out main competitor on margins, but we had to warn the financial markets that we wouldn't hit our ambitious targets. The city hates profit warning. I came under pressure and so took the difficult decision to step down."

Digital competitors

Thomas Cook's pre-occupation with a physical land-grab, prevented it from thinking and acting digitally.

Some of the reporting around the company's demise has talked about the waning interest in the package holiday as if everyone was now booking just on Airbnb.

While the proportion of package holidays sold in the UK is down from where it was in the mid-90s, volumes have increased in recent years and overall account for around 40 percent of the market, it's a similar story in Germany according to a Morgan Stanley analysis.

This might be down to European consumer laws brought in to offer financial protection for consumers buying packages, a worthwhile consideration given the instability in the industry. The upshot is that packages are still popular, just not necessarily in the way Thomas Cook sold them.

In the UK and elsewhere in Europe, online travel agencies arrived on the scene in the early 2000s. They were built from the ground-up so had none of the legacy issues Thomas Cook did and could therefore compete on user experience as well as price.

Chris Roche was a senior executive at both Travel Republic and Love Holidays, at a time when Thomas Cook was struggling to carve out a new identity.

"They were selling flights and hotel packages with exactly the same flights and hotels as On the Beach [another big online travel agency] and Travel Republic – and that's where you get into trouble. The user experience on the online players was in my opinion way better."

Customers had much more visibility when it came to building their own packages and much more flexibility when it came to booking with different airlines. To view the same kind of options on Thomas Cook you would have to run multiple searches.

There was also the bizarre situation when Thomas Cook separated its airline from its tour operator business and started running it as a scheduled, rather than charter carrier.

"In essence you've got Thomas Cook competing against itself. Thomas Cook is powering these agents who ultimately are fueling their demise," Roche said.

Another point worth considering is the ability of Thomas Cook's business model to cope with the economic and geo-political shocks that frequently derail the travel industry.

Its profit margin was wafer-thin compared with others in the same industry, making an act of terrorism of a financial crisis harder to weather. Online travel agencies, unlike tour operators, don't need to commit to hotel beds or airline seats well in advance.

"We don't have the same kind of need for infrastructure or asset-heavy cost base. Therefore, our cost base is just incredibly slim. We can obviously afford to be more agile and more flexible and we can present a wider range of products to consumers at a more competitive price point," Simon Cooper, the founder and CEO of On the Beach, told Skift in a 2017 interview.

The big question then is, if this was so bad for Thomas Cook why didn't it hurt its biggest rival TUI?

Building a Defensive Wall

On the surface Thomas Cook and TUI look like similar businesses. Both had airlines and physical stores and both operated across a number of European source markets selling package holidays. There are a number of crucial differences that have marked them apart over the years.

Firstly, TUI realized much earlier than Thomas Cook that with the rise of online travel agencies and their ability to undercut traditional tour operators, it needed to develop exclusive content that consumers could only buy through it.

"TUI had differentiated stock which they didn't distribute you couldn't get access to it, so you could only get it from TUI and that I think is their saving grace," said Roche.

Take for example, Cape Verde, an island country off the coast of West Africa, which has become a popular tourist destination recent years. Not only is it relatively inexpensive it also offers a geographical alternative to the Middle East. TUI has gradually built up its position in the country to such an extent that it now accounts for a third of all visitors. Thomas Cook on the other hand had to cancel its summer flight program last year because of "low demand."

"By the time Thomas Cook went into Cape Verde, which became quite a big destination for them at one stage, all the great product, all the great hotels had already been hoovered up by TUI," according to one source.

TUI's online operation doesn't have to be amazing — and of course the product is somewhat restricted — but it is able to set itself apart with exclusive, flights, hotels and cruises.

There's another big difference. In 2014 TUI AG and TUI Travel merged to create one giant tourism business. After the deal, the new company sold off a number of what it deemed, non-core businesses such as accommodation wholesaler Hotelbeds, generating millions of dollars. It then ploughed this money into developing more differentiated content with new resorts and ships.

"I would say the business models are very different. If you look in isolation at TUI's tour operator it has faced similar vagaries and seen similar pressure on margins. But this is offset by growth in its cruise and hotel businesses which Thomas Cook simply did not have to the same extent," said Stuart Gordon, senior analyst at investment bank Berenberg.

Under most recent CEO Peter Fankhauser, Thomas Cook realized this, but it came much too late. It started to make a much bigger deal about its own hotel brands and even developed a couple of new ones including Casa Cook and Cook's Club, designed to reach a new audience.

He also abandoned the practice of separating hotel guests by nationality a policy that illustrated just how siloed each of the regional European tour operators really were.

And who knows, if the deal with Fosun had come off maybe it would have been able to expand this part of the business, but in a way its emblematic of the inability of Thomas Cook to move with the times.

Distribution Versus Innovation

Alex Rampell, a partner at technology venture capitalist firm Andreessen Horowitz, said the "battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation."

He was talking about something different — TiVo versus the cable companies — but it's an interesting way of framing the demise of Thomas Cook.

The online travel agencies were able to get the distribution quite quickly, and used this to undercut existing package tour operators with a better user experience.

TUI was able to protect itself by developing its own exclusive content and other tour operators have had some success — notably Jet2 in the UK, although importantly it doesn't have an expensive store footprint to maintain, distributing via independent travel advisors instead.

Thanks to bad decisions, Thomas Cook racked up huge debts, meaning it wasn't able to innovate itself or buy other companies that might have helped. And with tight margins, it wasn't able to easily deal with challenges such as rising fuel prices or Brexit.

With a smaller retail footprint, less debt, more exclusive product, and a better online booking platform, maybe Thomas Cook could have survived. Hindsight is a wonderful thing.

This 150-year-old SF travel agency is not scared of the internet - SF Gate

Posted: 30 Sep 2019 11:53 AM PDT

An older image with several families posing together, dressed up, to take a Fugazi-booked charter plane to Italy.

An older image with several families posing together, dressed up, to take a Fugazi-booked charter plane to Italy.

Photo: Blair Heagerty / SFGate

Photo: Blair Heagerty / SFGate

Image 1 of / 43

Caption

Image 1 of 43

An older image with several families posing together, dressed up, to take a Fugazi-booked charter plane to Italy.

Photo: Blair Heagerty / SFGate

When asked what's been the biggest challenge as of late for Fugazi Travel, a 150-year-old travel agency in the base of a Financial District tower, the first answer is something that every San Francisco business faces: rent. Surprisingly, the second answer didn't have anything to do with the internet.

Before 2002, travel agencies made most of their money on airline ticket commissions. "We went through the whole airline commission cut," says Christine Fecchi, vice president of Fugazi. "When the airlines took away our commissions, we were very worried and nervous."

Fugazi is one of the last independent travel agencies in the city. The full-time staff of 8, plus twelve independent contractors, cater mostly to upscale travelers looking for carefully tailored itineraries to maximize their time abroad.

The airline commission change led the agency to move away from corporate travel bookings on which they earned mainly airline commissions and forced them to add a ticket purchasing fee, one of their only surcharges.

Fugazi takes care of tickets, hotel reservations, transportation, restaurant suggestions, and perhaps most valuably, works with local partners on-call to answer questions or help in emergencies. They earn most of their money via commissions from hotels and tour companies.

While it seems like these services would mostly appeal to older customers, according to Fecchi, younger generations are taking note.

"They're trying themselves to book online, but finding there's certain components they just don't know how to do," says Fecchi.

That includes tasks like setting up intercity travel and practical itineraries for places where an on-the-ground partner can make a big difference, citing Egypt, Japan and Africa as examples of places where an extra hand in planning a trip can be useful. And they've received the accolades to prove it: Travel & Leisure named them their #1 safari operator on the strength of the 85 packages they offer, which range from a five-day experience at the Seychelles Garden of Eden to an eight day Namibia desert escape.

Granted, many of these experiences could be booked independently or pieced together as a DIY itinerary, but Fugazi sees themselves as guarantors. In the age of Instagram travel, when most people's vacations are filtered to obscure missteps and bad decisions, a travel agency offers a level of curation and reassurance. Fugazi admits that the internet serves as a great travel tool, but as they see it, it can't compare to the total package.

"If you're looking for an airline ticket, that's one thing. If you're looking for a trip, that's something else," says Fecchi.

Fugazi dates back to the completion of the transcontinental railroad in 1869, and you can tell from walking around their office. Relics like a civil war bullet lodged in a railroad track rest on a beautiful wooden desk from their original office. A massive safe from the days when they doubled as a bank sits front and center. Stacks of oversized photo books of Italian islands serve as inspiration for prospective clients and hark back to the days when the company booked railroad and steam ship tickets for Italians immigrants coming to San Francisco.

Given it's their 150-year anniversary, 2019 was to be a celebratory year, but the anniversary became bittersweet when Fugazi's "fearless leader" George Lippi passed away from cancer at the age of 87. He was the third head of the company and worked actively until October of the previous year.

Fecchi, who has worked at the company since 1972, grows emotional when speaking about him.

"George was an extremely unique individual. He loved people, he loved life. His memory for detail was incredible. He had a way of, I won't say story-telling because it was all fact, but he could tell it in such a way that you just wanted to go."

That personal touch is one thing that distinguishes Fugazi from travel sites or social media recommendations. Another is their industry connections result in hotel perks that travelers might not receive otherwise, like breakfast, free wi-fi, late checkout, food credits and upgrades based on availability.

"If you book a hotel online, you have a reservation. If we book a hotel for you, you're expected," says Fecchi.

Dan Gentile is an SFGATE digital editor. Email: dan.gentile@sfgate.com | Twitter:@dannosphere

Search This Blog

BC Tourism